In an interview with CNBC-TV18, Inderjeet Singh Bhatia, Macquarie Capital Securities, speaks about his expectation from the Budget for the infrastructure sector. Bhatia doesn't expect much from the government. "I don't expect that the Budget will have much on infrastructure project awards and execution,” he says.
According to him, given the mood is so bad, the Finance Minister might want to say that infrastructure is still one of large focus area.
Within the sector, Bhatia is positive on transmission equipment, roads, diversified construction companies.
Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee.
CNBC-TV18: There is a talk of infrastructure development fund, which even the PM alluded to, do you think if that is announced, it would be just sentiment or could it turn the mood around materially?
Inderjeet Singh Bhatia: We believe that it is still going to be more of a sentiment issue. The implementation of this kind of fund is more important eventually for the market to get really excited about this. But I think at this point of time the sentiment itself has been so bad in the entire infrastructure space that the market would want to latch on to anything like this.
CNBC-TV18: What do you expect to hear from the budget? For people who are bullish on infrastructure, they are hoping that there will be some emphasis on execution and awarding of projects in the budget, things which have been held up for the last many months. Is it reasonable to have any expectations along those lines?
Inderjeet Singh Bhatia: To be honest I don't carry too much expectations from the government to talk lot about infrastructure project awards and execution in the budget itself. They have never done that. Budget is never a platform used to push projects. National Highway Authority is independent body and can do that, irrespective of the budget.
The expectations about some kind of duty protection for the capital goods or power equipment space have also receded a lot after Finance Ministry officials were quoted saying that that is unlikely in the current plan or so.
My sense is maybe, given the mood is so bad, the Finance Minister might want to say that infrastructure is still one of large focus area. Debt funding is something that they might try to address through this infra fund. But honestly I would keep my expectations low from the budget itself to award or push projects. I would look for NHAI or other ministries to push projects from now on for the next three-six months.
CNBC-TV18: For pure power plays, do you expect to hear something? There have been issues with merchant trades, but there seems to be lingering problems with the State Electricity Boards (SEBs) as well, do you expect the Finance Minister to address power as a sector?
Inderjeet Singh Bhatia: If you look at the power sector as a whole, some of the key issues, which have been highlighted off late, have been clearly merchant rates which have come off. We are far away from days for Rs 7-8, which were standard expectations, to now almost like Rs 3-3.5.
Other issues like SEBs, is a big issue. Issue like fuel availability is an extremely critical issue which is getting highlighted or focused by the market at this point of time. Any announcement by the government to create some kind of a support fund to SEB would be an extremely welcome relief for the whole power sector. If something on that front happens, some of these sectors which have been underperforming can come back to an extent. But we are not sure whether something on that line will actually come through in the budget or not.
CNBC-TV18: What would you be more bullish on in terms of verticals in the infra space between companies that focus on road projects, and those that do airports power plays, power ancillary plays? Who do you think will come out the strongest?
Inderjeet Singh Bhatia: Even last year our call was clear that there is no sector call to be made in infrastructure at this point of time. It is much more of a stock selection kind of thing which will continue to be dominant even getting into FY12. Looking at the last 12 months or so, the infra sector has not performed in unison.
The market has started to differentiate in terms of quality of balance sheets, leverage, management and those kinds of concerns. I think that would continue to remain dominant themes even going into next year.
We would continue to highlight the fact that, within the space, transmission equipment is something we are positive on. Eventually roads will also come back into flavour over a period of time. Overall, generally more diversified construction companies, larger construction companies could also going to be more positive at this point of time. But again balance sheet is something very critically I would look at rather than just keep looking at order books or order inflows.
CNBC-TV18: How much longer will it take for some amount of positive newsflow to come into the sector now? It has been a long wait and the numbers for this quarter were not great for many of these companies. By when do you think infrastructure companies will probably start talking about more awards, more projects, more execution, lower interest costs? When do you think a confluence of some positive events might actually start getting reported?
Inderjeet Singh Bhatia: What we understand from our discussions with various people in the government and in companies, NHAI is pretty ripe with 3000 to 5000 km of orders. They have been working on qualification documents for last 12 months or so. We recently have a new minister in that department, Q1 of next fiscal or Q2 can actually be a very good quarter in terms of project awards.
We had infrastructure panel in our conference last couple of days. There was a consensus that there is likelihood of some strong activity in Q1 of next fiscal year. So, I think that would be start of some kind of positive newsflow.
In terms of earnings and other macro factors, it is difficult to take a broader call because I think its still company specific. But interest rates kind of peaking out mid of FY12 or something, I think some of the macro concerns will again start to recede.
We also need to see how high commodity prices go. If commodity prices settle and we get a sense that the kind of inflation we are seen is kind of done for time being, I think the sentiment again will come back in the sector.
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